How social media might affect markets the way it has politics
GameStop, a bankrupt company, had a 3,000% rise in its stock price this month as gamers banded together on social media to collaborate and purchase shares online. The impact has put opposition hedge funds, who have attempted to profit from GameStop's bankruptcy, into a state of panic as they are now faced with a $5 billion bill. This is a story like David and Goliath which also begs the question of how markets might go the way of politics as it did with the recent rise of a radical President.
Former consumers of GameStop, very unhappy with its demise, banded together to devise a strategy to turn GameStop into the wealthiest company in the Russell 2000, at least for a brief moment in time. What was initially trading as a penny stock, they've bought call options contracts, a derivative that grows on the sudden rise of a stock price, which forced the counterparty, hedge funds, in this case, to cover their losses by buying additional GameStop shares. Online brokerage platforms have since blocked or limited access to these stocks to retail investors which has put them in the spotlight of being loyal to Wall St. over small investors.
This may be a case of market manipulation by these investors or completely legal, pending a review by the SEC^1. Just like in politics, social media can provide groups of like-minded thinkers to band together to change the conversation and create political change. A stock's success, however, is traditionally determined by its prospects for future growth, company earnings, and other fundamental factors. However these days, social media can broadcast false news or create pump and dump schemes by convincing the masses to purchase something that’s not otherwise in their best interest.
Social media can be used for both good and bad and we've already seen both sides of this story. We have not fully seen the scope of its impact on markets, however. Like with politics, we could see stocks move in a direction that is suspicious or counter-intuitive. This could set the stage for greater volatility and the rise of zombie companies, like penny stocks, whose only purpose is to price-war with hedge funds and retail investors.
Long-term investors should be wary about investments that may not be suitable. At Eureka Wealth Management, I help my clients identify investments that match their risk tolerance and time horizon. I also review tax strategies that may benefit them in the long run. Call for a free initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.